No money to pay to IRS? Don’t worry!

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Be cool, no need to panic

There are some criminal penalties if IRS can prove that you have not paid your taxes intentionally. But then IRS has to prove it. Considering that you really don’t have money to pay your tax, you are not going to jail.

First step is – to send the return once you complete it. Don’t hold it back just because you don’t have money to pay taxes. At least now you know the amount of taxes you have to pay. You can’t go to jail for non-payment, but you may go to jail for non-filing.

On filing the return, the IRS computers will be faster to send you a letter demanding the tax due and the interest, on that amount from the due date. There is a penalty of 5% per month or part of the month on unpaid taxes for late filing.

But non-filing or late filing does not mean payment of tax. So you should concentrate on payment of taxes. Is borrowing possible? Or you have some equity in your house? You may be able to arrange a home equity loan which can take care of or at least minimize your tax liability. Interest you pay on that loan is tax deductible for the next year.

Otherwise consider the credit card option. But then interest on such cards will not be deductible and it may be very high. Still, to come out of IRS clutches, you can try that option.

Negotiating with the government? You should better understand that the government dues are ranked at the top of your list of creditors. Any asset is good for the IRS. If you try to hide your assets, that is called fraud and you may be jailed for that.

What is the correct option?

Well you can ask for the installment plan. You should submit form 9455 requesting for an installment agreement. There are instructions on that form itself. You can fill in the details, sign and send it to IRS for approval.

If the taxes you owe are less than $25,000 then you may qualify. But you need to pay your bill within next five years. The payment period will be determined on the basis of your principal amount due and interest thereon. The rate of interest is issued by IRS in a news release in the last month of each quarter. If you overpay by mistake, then IRS will owe you interest!

If you are owing more, then its better to determine an appropriate amount of payment and then to make a request. The form is 9465 and you need to pay a fee of $102. The form asks you about how much is owed to IRS and how much would you like to pay. There is no need of an accountant or an attorney for this work. If you propose to pay all dues within next 12 months, your request will be generally granted. If you wish to set up a direct debit arrangement, then there is a one-time fee of $52.

Pay your money on due dates, otherwise there will be a further interest charge on unpaid amounts.

There is one more alternative. You can ask for ‘an offer in compromise’. So you need not pay 100% of your taxes due but a part in full settlement. This looks attractive, but not very easy. There are only two considerations for IRS on such a request:

  1. If your liability of tax is in question.
  2. IRS is doubtful about the recovery of taxes.

Such offers are approved these days on the basis of economic hardships also. If you have excellent record of filing your returns on time and paying your taxes in the past, and if IRS is convinced that collection of the entire tax dues will create economic hardship, IRS can agree to your request.

For this alternative, you need to file Form 656 which is a compromise application with a fee of $150. IRS has warned from time to time that this program is only approved under exceptional circumstances. You cannot use it just because you have a financial problem and it should not be used to avoid paying taxes. And very important – if you fail to pay as per the agreement, entire tax amount owed with interest and penalty will be due then.

Communication is the key

If you can’t pay your taxes, communicate with the IRS quickly. Don’t hide. Talk to them so that you will be more comfortable working with them.

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